Will the Minister's Review of the Indexation of University Grants  be a Clayton's Review? -- At Least it Ought to be Cheap. (December 10, 2004)

    In order to bring the Senate around so that the Minister for Education, Science and Training, Brendan Nelson's higher education reform package would get passed, Dr Nelson promised that the government would undertake a review of the current mechanisms of indexation in regard to Commonwealth funding of Australia's universities. The review is to be completed by the end of February 2005.

The percentage increases from1997 to 2002 are given in (  ). The wage cost indices need the following explanation, i.e. the increase for: WCI (education industry) = 19% WCI (professional occupations) = 19% WCI (all occupations) = 17%    CPI: Consumer Price Index = 15% AWE: Average Weekly Earnings = 25% WCI: Wage Cost Index = 17% SNA: Safety Net Adjustment = 8% CAF: Cost Adjustment Factor = 9.7%  - See Appendix B below   (current basis for university grant indexation = (75%SNA+25%CPI))   Group of Eight's suggested formula = (75% WCI (education)+25%CPI)

At the discretion of the Minister the matter will be reviewed internally, i.e. by his department in consultation with the departments of the Prime Minister and Cabinet, Finance and Administration and Treasury.

That in itself ought to give the universities a nice, warm, fuzzy feeling.

So far as the terms of reference are concerned (see Appendix A below) no external submissions need be called. Nevertheless, the Group of Eight has made public a thirteen page position paper, Position Paper on the Indexation of University Grants which sets out the history of university grant indexation back to 1974. It sets out the formula used through the Whitlam, Frazer and Hawke years through 1995 when the Keating Labor government redetermined the formula and the subsequent manipulations by the Howard Coalition to the present day.

It ought to make dry reading; it doesn't. With the introduction of the free market approach of Keating/Dawkins, followed by the subsequent interpretation of Howard/Costello it was made clear that the Commonwealth government intended and continues to intend to have Australia's public universities become as self sufficient as possible. Whether or not it is privatisation by stealth is a matter of opinion but it is pertinent that the Productivity Commission in its Economic Implications of an Ageing Australia estimates that sources other than federal funding will account for 66% of contributions to public universities' expenditure by 2045 (it currently amounts to just over 50%).

In the conclusion of the Group of Eight's position paper it poses some pointed questions:

"[W]hat is the purpose of the indexation? This has never been clearly articulated by the present government, or its predecessor. If the purpose is to maintain a particular standard of service and facilities, then funding needs to be adjusted by the cost of maintaining these standards." And the paper points out that is the reasoning behind the Commonwealth funding contribution for Australian schools.

 

"[O]n the other hand, [if] the purpose of indexing Commonwealth grants to universities is to force productivity and efficiency improvements on the sector then this needs to be explicitly stated and a mechanism put in place to measure the ‘efficiency’ dividend the government is extracting from the sector each year through inadequate indexation."

And in the view of the Group of Eight, "The failure to introduce more realistic indexation of university grants will further damage the quality of research and teaching in Australia’s universities with far-reaching consequences for the economy." They suggest that the measure (75 per cent Wage Cost Index (Education) and 25 per cent Consumer Price Index) would be as good an approximation to the changes in costs in higher education as is currently available.

Appendix A (Group of Eight position paper)

 

The terms of reference for the review of indexation the Government has committed to are contained in the Higher Education Support Act 2003 (C^th) as follows:

 

Section 198-25 Review of indexation;

 

(1) The Minister will initiate and undertake a review of the cost adjustment factor indexation mechanism for the Commonwealth funding of universities from 2007/08.
 

(2) The review must be completed by February 2005 and the Government must respond to the review by April 2005 and give effect to its response when introducing the annual Higher Education Support Amendment Bill in the 2005 May sittings of the Parliament.
 

(3) Without limiting the scope of the review, the reviewers must, among other things, consider the following:

(a) the alternative indices to use for wage costs—for example, the relative merits of average weekly earnings, the Commonwealth’s education wage cost index, baskets of domestic professional wage rates and purchasing power parity adjusted indices for academic labour;
 

(b) the alternative indices for non-wage costs, noting the high reliance of universities on advanced equipment, information technology, research infrastructure and international book and periodical stocks;
 

(c) the application of any agreed index or indices to the actual Commonwealth-funded staffing and financial profile of each university rather than the application of an assumed uniform profile.

Appendix B (Group of Eight position paper with minor omisions)

 

The Higher Education Cost Adjustment Factor (CAF)
(from Australian Government, 2004, Higher Education Report for the 2004 TO 2006 Triennium page 116.)

The Higher Education Cost Adjustment Factor (CAF) is an index reflecting the contribution the Commonwealth makes towards increases in the operating costs of higher education institutions. The CAF does not measure actual price rises but the Commonwealth’s contribution towards annual increases in salary and non-salary costs. Salary costs notionally constitute 75 per cent of grants. This component of the CAF is based on the Safety Net Adjustment (SNA) as determined by the Australian Industrial Relations Commission. Non-salary costs notionally constitute 25 per cent of grants and are indexed using the Consumer Price Index (CPI). Before 2001 the Treasury Measure of Underlying Inflation was used instead of the CPI. Figures for the CPI and SNA are provided by the Department of Finance and Administration in June of the preceding year, around 6 weeks after the Federal Budget. The resulting CAF applies to the whole of the following calendar year and indexation starts from the first payment each year.
 

In this Report all figures for 2003 are actual amounts (unless stated otherwise). All amounts for 2004 are estimates using the current legislated 2004 CAF (i.e. 1.188354) - SNA 2.1 per cent and CPI 3.0 per cent. Figures for 2004 have not been adjusted for anticipated movements in the CAF. It is likely that the 2004 preliminary will be the 2004 actual.
 

Cost Adjustment Factor Index, 1995 to 2004
1995 1.000000
1996 1.015750
1997 1.033823
1998 1.050122
1999 1.066707
2000 1.085211
2001 1.108650
2002 1.134358
2003 (preliminary) 1.158914
2003 (final) 1.161183
2004 (preliminary) 1.188354